Live: Wednesday, Nov. 7, 2018

2:40 p.m. New York time

I’ve updated with results the analyses of all of the positions I exited: HONMSFTJNJ, MCD and WBA.

2:25 p.m. New York time

I’ve entered a short iron fly position on QCOM.

11:20 a.m. New York time

Three more exits: JNJ, MCD and WBA.

10:25 a.m. New York time

Two exits: HON and MSFT. I’ll update the analyses later with results.

Today’s Book

The Return of High Inflation: Risks, Myths and Opportunities,

by Wolfgang H. Hammes

Preternaturally low inflation has been with us for a decade, and memories are fading of the long years of rapidly rising, sometimes runaway, prices.. As the Federal Reserve raises interest rates in defense against inflation, many voices can be heard muttering, “Inflation? What’s to worry? Don’t bring back the recession.”. Hammes argues that the risk of inflation is real, and in this well researched book provides a map of the world we’ll be trading in when (not if) inflation once again returns.

More about the book

10:15 a.m. New York time

I’m looking at several prospective earnings plays today. It’s a choice from a fairly poor group. More on that later, but first, a change in my exit rules that may make it necessary to loosen by rules on acceptable trades.

This will be another clean-up day. I’m altering my exit rules based on research performed by TastyTrade, the best source of research and information regarding practical options trading. They’ve been important to my work in forming trading strategies and rules.

Before I go into details here, allow me to point to a 15-minute video in which a TastyTrade researcher discusses the new strategy. It is called, “A Deeper Look into 21 Days“.

My practice exiting trades at 25% of maximum potential profit for iron flies, which I use for earnings plays, and 50% of maximum potential profit for other options structures was based on TastyTrade research.

The  video discusses research that identifies a third metric for exits: 21 days. Combined with the two earlier metrics, then, my rule goes like this:

Regardless of the current result, exit at 50% of maximum potential profit (25% for iron flies) if the level is reached prior to 21 days before the options expire; otherwise, exit at 21 days before expiration.

In term of my account: I have six positions that are nine days away from expiration. I shall begin by exiting two that are profitable,  EWZ and HON, today, and possibly other that are unprofitable: JNJ, MCD, PM and WBA. Under my long-standing rules, all we be exited by next Tuesday (normally Monday, but it’s a holiday). I’ll consult the charts to decide when to exit the unprofitable holdings.

That will free up funds for additional trading, and I shall do so, based on a high implied volatility rank and a market capitalization. Since we’re late in the earnings season, the high-cap companies have already published, so I’ll need to be more flexible in that metric in order to have trades.

And back to the earnings plays. Both PRU and WYNN  in the 2nd quintile (61-80) of its implied volatility rank. PRU has a better market cap, at nearly $40 billion. WYNN’s cap is a bit more than $12 billion.

Both are moving in line with the S&P 500, meaning that they are trading below the annual moving average. Since, as I’ve said, I’m bearish on the broad markets, I prefer stocks that running contrary to the markets, defined as above the moving average.

QCOM is the one high market cap ($93 billion) stock that meets that criterion. However, its implied volatility rank is in the 3rd quintile.(41-60), although at the high end. I shall look at it further and perhaps do an analysis and trade.

The pool of potential earnings plays:

1st quintile (81-100): CROX

2nd quintile (61-80): WYNN, TIVO and PRU

3rd quintile (41-60): MRO and QCOM

4th quintile (21-40): NVAX, NRG and WIN

Here is where my options positions stand.

sym option debit share price beyond profit zone curr % max profit net prft/shr $ option days left
EWZ 0.85 39.89 1.2 0.01 9
HON 6.00 148.87 5.4 0.34 9
JNJ 8.02 143.69 high (43.2) (2.42) 9
MCD 9.30 182.21 high (50.0) (3.10) 9
MSFT 8.28 110.96 3.7 0.32 44
PM 3.54 88.51 high (3.2) (0.11) 9
SPY 5.25 277.46 (24.4) (1.03) 44
UPS 7.80 108.08 4.9 0.40 44
WBA 4.50 80.87 high (26.4) (0.94) 9

And where my shares positions stand.

sym share price net result % net profit $ days held
AAPL 205.59 -8.2% (18.37) 54
CHK 3.70 -7.5% (0.30) 54
FXI 41.42 0.5% 0.21 54
SPXU 36.27 -10.6% (4.29) 176
TSLA 347.93 14.1% 42.94 37

By Tim Bovee, Portland, Oregon, Nov. 7, 2018

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.


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